Schools lobby against limits on bonds

Bonds shift burden to future

California public schools have issued hundreds of so-called capital appreciation bonds since 2007. The bonds are controversial because they allow schools to build new classrooms and football stadiums but shift the payments to future generations of taxpayers.

The bonds are also expensive. That's because they are like a loan where no principal or interest payments are made for as long as 40 years. Interest is charged on a growing pile of unpaid interest, causing the balance to balloon.

San Bernardino County's Rim of the World used the bonds to borrow $283,612. That single debt will cost taxpayers 23 times that amount – or $6.7 million – to pay back.

Compare that with a 30-year home mortgage with a 5 percent interest rate, which requires payments of about twice the amount borrowed.

Schools have increasingly turned to the bonds to escape legal limits on debt and property taxes.

California's public schools are lobbying hard against a bill that would stop them from continuing to issue some of the nation's most expensive debt.

Under pressure from the schools, a California Senate committee is talking about substantially weakening the bill that targets so-called capital appreciation bonds. One of the proposed amendments would greatly increase taxpayers' cost. A vote is scheduled for Wednesday.

The bonds allow schools to build new classrooms but push payments as far as 40 years into the future. This significantly raises the cost because interest is charged on a growing pile of unpaid interest.

The legislation has angered many school officials, who say the public has overreacted as details have emerged that dozens of districts across the state have recently issued the bonds, including many that have left local taxpayers with a tab of 10 to 20 times the amount borrowed.

At a hearing last week, Jeffrey Vaca of the California Association of School Business Officials lashed out at critics who had said schools were using the bonds to "game the system."

Vaca said school officials had "nothing more than a sincere desire" to provide safe classrooms.

A similar sentiment that districts had done little wrong was present at the association's conference in Long Beach in April, when school officials, bond lawyers and financial executives discussed the controversy in a session titled "Questionable practices in the world of bonds, or are they?"

But critics say the schools are wrongly burdening future generations with expensive payments for classrooms and sports stadiums that they may never get to use.

"Anyone who thinks the need is so urgent that they have to pay 20 times or 10 times the amount they borrowed to build facilities isn't dealing with the community in an honest way," state Treasurer Bill Lockyer said at the hearing.

Some schools have continued issuing the bonds despite a warning in January by Lockyer and state Superintendent Tom Torlakson to hold off until legislation could be passed to stop districts from leaving taxpayers with what they called exorbitant repayments.

Since January, schools have issued at least 22 more capital appreciation bonds, according to Lockyer's office.

Orange County's Westminster School District issued $21 million in capital appreciation bonds in March that will cost taxpayers as much as $111 million to pay back – more than five times the amount borrowed.Most of the money is due between 2035 and 2052.

Michigan outlawed such bonds in the 1990s. The bill in Sacramento, known as AB182, would allow schools to continue issuing the bonds but limit costs by banning some of their most expensive terms. Loan periods of 40 years and interest rates of 12 percent would be capped instead at 25 years and 8 percent.

The bill passed the Assembly, 75 to 0, but has faced opposition in the Senate, where it is now before the education committee.

An analysis of the bill prepared by the committee's consultant took the schools' side. It also echoed suggestions made in a letter by the California Public Securities Association, whose members include banks that make millions by underwriting municipal bonds.

The consultant, Kathleen Chavira, who works for the committee's Democratic chairwoman, Sen. Carol Liu, recommended that the bill be amended to include some of the most expensive changes the schools have lobbied for.

Those who favor the proposed limits say the amendments would gut the measure.

In recent days, the bill's authors and Liu have talked about capping loan repayment periods at 30 years – a change that could prove costly to future taxpayers.

Tim Schaefer, a municipal finance adviser in Newport Beach, said that allowing 30-year terms could substantially increase the cost, depending on the interest rate. A 30-year bond with an 8 percent interest rate – the highest rate allowed in the bill – would require repayments of 10.5 times principal, he said. That's an increase of 48 percent from the repayments of 7.1 times principal required of a 25-year bond.

The banks, law firms and financial advisers are paid fees each time a school issues bonds. That has given executives an incentive to press districts to keep building even when they can least afford it. The executives have urged schools to use the bonds to leap over the legal limits on debt and property taxes and shift payments to future taxpayers.

"Who is the biggest beneficiary of these long-term deals?" San Diego County Treasurer Dan McAllister asked at last week's hearing. "It's not the schools or taxpayers."

Instead, it's the financial firms, he said.

The firms' lobbyists have largely stayed behind the scenes. Instead, the bankers and lawyers have allowed groups like the school business officials association and the Coalition for Adequate School Housing take the lead. At first glance, those groups appear to represent district officials, but they are heavily subsidized by companies that hope for school business, and their executives, who pay to become members.

At recent CASH meetings, executives of financial firms have sharply criticized the bill. In February, a banker from Stone & Youngberg and a public finance lawyer from Orrick, Herrington & Sutcliffe told school officials that the bill had "far-reaching negative implications."

The executives said the bill's limits were "not practical," according to slides of their presentation. They also said that restricting interest rates to 8 percent would reduce the districts' ability to sell bonds at a premium – a controversial practice that allows schools to borrow more money than voters authorized.

Joe Dixon, assistant superintendent at Santa Ana Unified, is the current CASH chairman. In 2009, Santa Ana issued $35 million in capital appreciation bonds that will cost taxpayers nearly 10 times that amount, or $340 million, to pay back.

At last week's hearing, Tom Duffy, a lobbyist for CASH, called the bill "regressive."

"We have an obligation to serve the children," he said. "This bill goes too far."

But Mark Luce, a Napa County supervisor, urged senators to set strict limits. He compared the bonds to learning that your adult child had bought a $20,000 car, but had agreed to terms that would eventually require payments of $150,000.

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